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Buffett Cuts Bond Allocation

Warren Buffett cut Berkshire Hathaway’s insurance units’ bond allocations to the lowest amount that he has in over a decade. The company actually warns that low yields are going to hurt results. As of December 31, fixed income assets currently make up 14% of total investments at the insurers, we learned according to the annual report. Since 2002, typical year-end figures have been in the area of 20% to 25%, according to Berkshire Hathaway’s documents.

Of the $186.8 billion portfolio, $114.8 billion of it consisted of stocks. Warren Buffett “is trying to maximize the total return,” said Nomura Holdings Inc. analyst Cliff Gallant. He “sees more opportunity in his stock purchases than he does in his cash and bond holdings.” Buffett has told us that low yields mean that insurers and other investors in bonds are holding a wasted asset. As a way to counter that, he put together private deals for added equities and higher-paying securities.

Berkshire Hathaway, based out of Omaha, Nebraska, has made investments to acquire energy utilities and railroads. “Our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for our endless gusher of cash,” wrote the 83-year-old Buffett in his shareholder letter, recently published on March 1.

As of December 31, the Berkshire Hathaway cash pile was $48.2 billion. When compared to last year at $47 billion and the end of 2009 at $30.6 billion, it’s very high. Carrying anything more than $20 billion is too much, Buffett said to Betty Liu of Bloomberg Television. Buffett has also been recently in favor of shorter duration bonds. As of the end of 2013, Berkshire Hathaway currently has $8.5 billion worth of bonds due in one year or less.

You can compare that to only having $6 billion of these bonds at the end of 2012. They typically offer lower yields than you would get for longer duration securities, but they do provide more flexibility. Last year, corporate bonds in the US returned 0.34%, and that’s the lowest since 2008. According to Bank of America Merrill Lynch, this compares with an annualized 13.5% from 2009 through 2012.

“The valuations of corporate bonds are close to their historic extremes courtesy of the rally,” said Edward Marrinan, an RBS Securities credit strategist, during a telephone interview.

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